Fifth Circuit Court of Appeals Upholds Determination that Mississippi "Stop Notice" Statute is Unconstitutional

On October 10, 2013, the Fifth Circuit Court of Appeals affirmed a district court determination that Mississippi Code Annotation § 85-7-181 is unconstitutional. As prime contractors and owners know, an owner’s receipt of a stop-payment notice or "stop notice" could bring the flow of contract payments to a grinding halt. Miss. Code Ann. §85-7-181 required an owner to hold sufficient funds, otherwise due to a prime, to cover the amount alleged to be due and owing to a first-tier subcontractor who sent written notice that it was claiming the benefits of the "stop-payment" notice statute. Depending upon the amount of contract funds still remaining in the owner’s hands, if the owner paid the prime over the notice and thereby diminished sufficient funds available to pay the subcontractor, the stop-payment notice statute made the owner directly liable to the subcontractor. Owner-compliance, as intended by the statute, gave subcontractors (at least the first-tier) their only powerful tool to enforce payment rights on private, un-bonded projects.

The "stop-notice" statute has been in place for year, but on April 12, 2012, the Northern District of Mississippi ruled the statue unconstitutional on its face because it deprived prime contractors of property without due process. Noatex, an unlicensed California prime contractor, was hired by Auto Parts Manufacturing Mississippi ("APMM") to build an auto parts manufacturing facility. Noatex got into a billing dispute with its Mississippi subcontractor, King Construction of Houston, L.L.C. When King Construction sent a stop-payment notice to APMM asserting it was due over $260,000 from Noatex, that amount became bound in the hands of APMM. Noatex filed a declaratory judgment action, challenging the stop-payment notice statute as facially invalid and invalid as applied. The State of Mississippi, through the Attorney General’s Office, intervened in support of the stop-payment notice statute. Judge S. Allan Alexander agreed with Noatex, holding that simply by giving written notice of an alleged debt a contractor’s payment became bound in the hands of the owner—with no hearing before the money was bound—and thus the contractor was deprived of its property without due process.

The Fifth Circuit upheld Judge Alexander’s analysis. Among other things, the Fifth Circuit noted that the statute is "profound in its lack of procedural safeguards": no posting of a bond, no showing of exigent circumstances, and no sworn statement setting out the facts of the dispute. You can read the decision here.

Unless there are changes to the current stop payment law or the United States Supreme Court agrees to consider this issue, if appealed by the Mississippi Attorney General, there will be no "lien rights" for first-tier subcontractors. Only contractors with a direct contractual relationship with the owner will have lien rights.  Subcontractors may want to seek legal counsel concerning how to address stop payment notices that were to be filed or have been filed and to determine other remedies that may be available if their prime has failed to make payment.   

Who can be a "Qualifying Party" for a Contractor's Certificate of Responsibility - Update

On May 13, 2009, I published a blog titled "Who can be a "Qualifying Party" for a Contractor’s Certificate of Responsibility". [Click to view blog post] The blog article states that the requirement for a contractor’s Certificate of Responsibility for a public contract is $50,000 and a private contract is $100,000. Since the writing of that blog article, the statute has been amended and effective July 1, 2010, a Certificate of Responsibility is required on all contracts, both public and private, in excess of $50,000.

Fifth Circuit Upholds Mississippi's $1 Million Cap On Noneconomic Damages

Yesterday the Fifth Circuit Court of Appeals issued its opinion upholding as constitutional the Mississippi statute that caps the award of noneconomic damages at $1 million. Miss. Code § 11-1-60(2)(b) provides:

[i]n any civil action filed on or after September 1, 2004, …in the event the trier of fact finds the defendant liable, they shall not award the plaintiff more than One Million Dollars ($1,000,000.00) for noneconomic damages.

The term "noneconomic damages" is defined in §11-1-60(1)(a) to include "subjective, nonpecuniary damages arising from" death, pain, suffering, inconvenience, mental anguish, emotional distress, loss of enjoyment of life, loss of consortium, and other nonpecuniary damages. However, "noneconomic damages" do not include punitive or exemplary damages.

Lisa Learmonth was injured in an automobile accident and sued Sears, Roebuck and Co. for her injuries. A total award of $4 million was made by a jury, and $2.2 million of that amount was deemed to be for her noneconomic damages. When the district court reduced the $2.2 portion of the award to $1 million under §11-1-60(2)(b), Learmonth challenged the law as violating the Mississippi Constitution’s jury trial guarantee and separation of powers provisions.

The Fifth Circuit affirmed the lower court’s application of the $1 million cap. Noting it was Learmonth’s duty to prove the statute unconstitutional, the Fifth Circuit determined that burden was not met on the issues she presented on appeal. The Fifth Circuit rejected Learmonth’s argument that the legislature could not enact a legal remedy which limited an award of damages made by a jury. The Fifth Circuit also rejected her argument that the statute impermissibly allowed the legislature to dictate to the judiciary procedures or guidelines for determining awards. You can find the opinion here.

Agreement to Arbitration Trumps Right to Jury Trial

In a recent Mississippi Supreme Court decision the Court considered language in a contract which contained an arbitration provision, which excluded aesthetic-effect claims from arbitration. Click here to see decision. The contract in question was the AIA Document A101-1997 Standard Form of Agreement Between Owner and Contractor and AIA Document A201-1997 General Conditions for the Contract for Construction. The Owner maintained that because the contract stated "[a]ny Claim arising out of or related to the Contract, except Claims relating to aesthetic effect and except those waived…shall, be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party" there had been no clear waiver of its right to a jury trial. The trial court disagreed and on appeal the Mississippi Supreme Court affirmed.

The Court found the language of the contract required arbitration of all claims with the exception of those relating to aesthetic effect. Opinion on whether there had to be an express waiver of the right to a jury trial, the Court stated:

No caselaw suggests that, to be valid, an arbitration agreement must include an express statement which waives the right to a jury trial.

[T]he Constitution does not ‘confer the right to a trial, but only the right to have a jury hear the case once it is determined that the litigation should proceed before a court. If the claims are properly before an arbitral forum pursuant to an arbitration agreement, the jury trial right vanishes.

McKenzie Check Advance of Miss., LLC v. Hardy, 866 So.2d 446, 455 (¶30)(Miss. 2004)(citations omitted). Section 11-15-103 requires only a written agreement to arbitration.

Thus, the Court makes it clear that where a contract includes an agreement to arbitrate disputes, there is no need to have an express waiver of the right to a jury trial.

Mississippi Code Section 31-5-41 Not Applicable to Performance Bonds

The Mississippi Supreme Court recently decided an appeal concerning whether Miss. Code Ann. § 31-5-41 applied to a performance bond surety where the performance bond incorporates the terms and conditions of a construction contract. Miss. Code Ann. § 31-5-41 provides that all public or private construction contacts that contain a provision agreeing to "indemnify or hold harmless another person from that person’s own negligence is void as against public policy and wholly unenforceable." It also states that "[t]his section does not apply to construction bonds or insurance contracts or agreements."

In the case decided by the Court, the general contractor was sued by the owner of a building for alleged construction defects. The owner also sued the performance bond surety for breach of the performance bond and bad faith denial of its claims. The surety sought to enforce its indemnity agreement with the general contractor. However, the trial court denied the surety’s claim for indemnification finding its potential liability arouse out of its own negligence. The Mississippi Supreme Court reversed the trial court simply finding the language of Miss. Code Ann. § 31-5-41 provides that it does not apply to "contraction bonds or insurance contracts or agreements." The Court went on to state that "[t]his remains true even if the performance bond incorporates the construction contract by reference."

Even though the general contractor was unable to use Miss. Code Ann. § 31-5-41 as a defense against the surety’s claim for indemnity, this statutory provision does afford the general contractor protection against broad indemnity provisions in other construction related contracts.

Only One Bite at This Apple: The Exclusive (Maybe) Remedy of Workers' Compensation

In Mississippi, workers’ compensation laws replace traditional negligence actions against the employer in exchange for a no-fault system of payment to the employee. This exclusivity of remedy is the product of the "bargain" underlying the workers compensation laws. According to that bargain, the benefit to workers is compensation for all work-related injuries without reference to fault of either the employee or employer. Employees, in return, surrender the right to pursue "all other liability." Employers benefit by having the amount they have to pay to any worker capped. Employers in turn agree to assume the financial burden (through insurance) of all work-related injuries without reference to fault.

The exclusive remedy creates immunity to suits for damages by the employee against the employer but only if the employer actually provides the insurance required by the statutes. If the employer is required to provide insurance and fails to do so, then the employee may pursue a claim under the workers’ compensation act or can sue the employer for damages. The employee gets to decide which route to take and, if a suit for damages is filed, the employer is even prohibited from asserting that the employee assumed the risk or contributed to the injury.

The penalty for failing to maintain required workers compensation insurance gets even stronger. The employer (including the president, secretary and treasurer if the employer is a corporation) can be subject to criminal prosecution for a misdemeanor which carries a potential penalty of $1,000 and/or imprisonment of up to one year, in addition to the recovery to which the employee is entitled. A civil penalty up to $10,000 can also be assessed by the Mississippi Workers Compensation Commission.

For contractors, the burden is even greater. General contractors are considered "statutory employers" of the employees of subcontractors. If the subcontractor provides workers compensation insurance, then the general contractor gets the same protections as the subcontractor has. However, if the subcontractor does not provide workers compensation insurance, the general contractor is statutorily responsible to provide the insurance and be liable for payment or compensation to the injured employee.

The potential consequences (damages, fines and jail time) for failure to provide required insurance are too great to ignore. General contractors cannot assume that subcontractors are carrying workers compensation coverage. As a matter of routine, general contractors should require proof of such insurance, together with an acknowledgement from the insurance provider that coverage will not be cancelled without advance written notice to the general contractor. It is also wise for the general contractor to require that the subcontractor’s coverage add the general contractor as an additional named insured.

Contractor's Right to a Speedy Trial

Contractors, subcontractors, suppliers and even owners can become frustrated at the length of time it takes to have a dispute reach the courthouse.  Their lawyers are also frequently concerned about whether jurors will be able to understand the complex issues associated with a construction dispute.  One way to address this problem is to agree to a bench trial.  If the parties can agree to a bench trial, Miss. Code Ann. § 11-1-18 (Supp. 2008) provides as follows:

If the parties to a cause of action agree, any claim filed alleging damages may receive a bench trial which shall be conducted in two hundred seventy (270) days or less after the cause of action has been filed. The cause of action shall be a priority item in the court.

Emphasis added.  This statute is frequently overlooked but could be just the answer for a contractor that wants a timely resolution of its dispute.

New Document Formatting Standards Effective July 1, 2009 for Chancery Court Documents

Effective July 1, 2009, "any document or instrument presented to the clerk of chancery court for recording" will be required to comply with the requirements set forth in Miss. Code Ann. § 89-5-24 (House Bill 475).  The detailed requirements were apparently made necessary to bring uniformity to instruments filed with the chancery court.  Although the statute identifies a number of instruments that are exempt from the new formatting requirement, construction liens are not included in this list.  Fortunately, the "[f]ailure to conform to the format standards specified…does not affect the validity or enforceability of the document or instrument".  Miss. Code Ann. § 89-5-24(5). However, you will be assessed an additional ten dollars ($10.00) for each document or instrument that does not comply.  Miss. Code Ann. § 89-5-24(4).  Click here to see a copy of the Rankin County Chancery Court’s instructions concerning these new formatting requirements and a sample form.

Arbitration Clauses - A Balancing Act

The Mississippi Court of Appeals just released a decision addressing the scope of arbitration clauses. Although the case dealt with an employment agreement, the decision is certainly a warning sign for arbitration clauses in any contract.

At issue in the case was whether tort claims for assault and battery were included within the arbitrable claims of the employment agreement. The agreement required arbitration of "all matters directly or indirectly related to your recruitment, potential employment, or possible termination of employment, including, but not limited to, claims involving and/or against the Company, employees, supervisors, officers, and/or director of [Company] or any affiliates, as well as any other common law claims for wrongful discharge or other similar claims." Even though the Court determined that the foregoing language was broad and that the claims stemmed from a supervisor’s alleged actions while on a business trip, the Court nevertheless ruled that the arbitration provision did not include claims for assault and battery.

One judge disagreed with the Court’s majority. In a separate opinion, the dissenting Justice noted that in a case decided four years prior an agreement that required "any dispute under this agreement" to be arbitrated included intentional tort claims.

The current decision does not overrule the older court decision, and distinguishing factual circumstances can be found between the two decisions. However, the current decision at least constitutes a warning signal that the Court will look more closely when considering whether intentional torts fall within the ambit of arbitration provisions. A delicate balancing act will be required to make arbitration provisions broad enough to capture as much as possible, yet specific enough to include what might be considered more remote claims. Everyone should revisit the language of its contractual arbitration provisions or risk being in court to settle disputes rather than arbitration.

Using the "Best Evidence" of Construction Damages is Required to Ensure Recovery

Mississippi law requires that a party introduce the "best evidence" available to prove its alleged damages.  The Mississippi Supreme Court has stated the basic rule of proof of damages as follows:

It is absolutely incumbent upon the party seeking to prove damages to offer into evidence the best evidence available [for] each and every item of damage.  If he has records available, they must be produced.  While certainty is not required, a party must produce the best that is available to him.

See Eastland v. Gregory, 530 So.2d 172, 174 (Miss. 1988) (emphasis added).

In applying this rule, the Mississippi Supreme Court held that evidence was insufficient where a party claimed that a buyer had breached its contract to buy a house and the owner had to sell to someone else at a lower price.  The "best evidence" of the sale at the lower price was not introduced because "no records were produced of the sale and event he name of the purchaser was not mentioned."  Id. at 173.  The Court indicated the kind of evidence that would have been "best", observing "[t]here was no contract of sale with the second purchaser offered into evidence, no check for purchase price, no deed, no record whatever, simply the statements by Mr. and Mrs. Gregory [the owner] that the house sold for $175,000.00."  Id. at 175.  The owner also claimed interest paid on a construction loan he had to take out in the amount of "about $4,300.00."  Id. at 174.  Even though a copy of a note was introduced into evidence, the Court ruled that the testimony was in error, stating:

In the first place there was no showing that the Eastland's breach of the contract in any way necessitated Mr. Gregory borrowing $85,000 to build his new home...  There may have been some damage occasioned by the breach of contract in addition to having to sell the residence for a less sum of money, but no predicate whatever was laid for such assessment by the jury.  A bare conclusory statement by Mr. Gregory that because of the Eastlands' breach he had to borrow the money hardly suffices.

Id. at 174 (emphasis added).  See also Caver v. Brown, 818 So.2d 376 (Ct. App. Miss. 2002) (citing Eastland); City of New Albany v. Barkley, 510 So.2d 805, 807 (Miss. 1987) ("while the measure of damages need not be perfect, the most accurate and reliable evidence available should be required.")

The rule is very straightforward and has been summed up precisely:

...[T]he highest degree of proof of which a case is susceptible must be produced.  This is the Mississippi rule...  What we rule here is that if basic fact records exist, those records, not opinions as to what they could have been, should form the evidentiary basis for introducing their content into this cause.

See Harrison v. Prather, 435 F. 2d 1168, 1175 (5th Cir. 1971) (emphasis added).

In addition, the Rule 1002 of the Mississippi Rules of Evidence provides that "[t]o prove the content of a writing, recording, or photograph, the original writing, recording, or photograph is required, except as otherwise provided by law."  This rule reflects the "best evidence rule."

 

Who Can be a "Qualifying Party" for a Contractor's Certificate of Responsibility?

To perform any public contract of at least $50,000 or private contract of at least $100,000, a contractor must hold a Certificate of Responsibility issued by the Mississippi State Board of Contractors.  It makes no difference whether the "contract" to be performed is a prime contract or subcontract at any tier.  Miss. Code Ann. 31-3-15.

Moverover, Mississippi law does not permit the "borrowing" of certificates of responsibility.  Only a responsible managing officer, employee, or member of the executive staff of the applicant for the certificate can serve as its qualifying party.  The statutes creating the State Board of Contractors, which governs the licensing of contractors, and that Board's regulations implementing those statutes are designed to prevent one person from serving as the qualifying party for entities in which he or she has not personal or managerial stake or responsibility.  To allow otherwise would dilute the requirements which are meant to ensure the integrity, financial capacity, and technical capability of all entities performing construction in Mississippi.

Miss. Code Ann. 31-3-1 defines a "certificate of responsibility" as a "certificate numbered held by a contractor issued by the board under the provisions of this chapter after the payment of the special privilege license tax..."

Miss. Code Ann. 31-3-13(a) defines who can be the "qualifying party" or an applicant of a certificate of responsibility, whether such application is for a new certificate or a renewal certificate.  Specifically, it states:

The board shall take applicants under consideration after having examined him or them and go thoroughly into the records and examinations, prior to granting any certificate of responsiblity.  If the applicant is an individual, examination may be taken by his personal appearance for examination or by the appearance for examination of one or more of his responsible managing employees; and if a co-partnership or corporation or any other combination or organization, by the examination of one or more of the responsible managing officers or memebers of the executive staff of the applicant's firm, according to its own designation.

The intent clearly is that a qualifying party be a responsible managing employee for or officer of the applicant, whether it's a sole proprietorship or corporation.  The true "responsibility" for which the certificate is issued cannot be determined otherwise.  In construing this requirement the State Board of Contractors promulgated the following regulation which, again, leaves no doubt that the "qualifying party" must be intimately involved in the management and/or ownership of the entity claiming him or her as their qualifying party.  Rule L states:

When the qualifying party terminates employement with the Certificate holder, the Mississippi State Board of Contractors must be notified in writing, by the qualifying party and the Certificate holder, within thirty (30) days of the disassociation and another party must qualify within one hundred eighty (180) days or Certificate holder will be subject to suspension or revocation of its Certificate of Responsibility.

(Emphasis added).

Thus, where a purposed "qualifying party" for Company A is neither a managerial employee nor an officer of that company but, in fact, owns or is the officer of another, unrelated Company B, but Company B routinely serves as a subcontractor to Company A, Company A and its purported "qualifying party" are in violation of MIssissippi law and the Rules and Regulations of the State Board of Contractors.  (This is typically done where owners of two companies do not want to commingle business assets, finances, or interests, but they do want to pursue and perform contracts together.)  Company A's Certificate of Responsibility is null and void as a matter of law.

 

Checklist for Mississippi Construction Contractors

If you have ever been the apparent low bidder on a public construction project and had your bid rejected because of an irregularity in the bid documents, you are not alone.  What is even more frustrating, and will make you fighting mad, is when the public agency decides to waive the same irregularity of a competitor when you are the second low bidder.  Perhaps the best way to avoid this situation is to make sure that you have completed your bid in strict accordance with the instructions to bidders.  I know it is difficult to focus on all the particulars when less than an hour before the bid is to be submitted subcontractors and suppliers are sending in prices or changing the ones previously provided.  Here is a simple bid checklist that may help you avoid those last minute mistakes.

  • Read the "Instruction to Bidders" when you obtain a copy of the solicitation to make sure that there are no unusual or different bid requirements. 
    • Pre-Bid Conference
    • Bid Bond
    • Site Visit
    • Listing of Subcontractors
  • Prepare the bid envelope in advance, identifying (1) the project, (2) the person to whom the bid is to be submitted, (3) the location where the bid is to be submitted and (4) the date and time for the submission of the bid.  ALWAYS PLACE CERTIFICATE OF RESPONSIBILITY NUMBER ON THE OUTSIDE OF THE ENVELOPE.
  • Complete the bid form and check to determine whether all the blank spaces for prices are completed with a dollar amount or a "---" or "-0-".
  • Check your addition and multiplication for unit prices and total bid price.
  • Acknowledge all Amendments/Addenda to the solicitation.
  • List subcontractors, if required.
  • Sign and date the bid documents.
  • Check the bid bond, if required, to make sure that it is in the correct amount and proper form.
  • Place bid documents and bid bond, if required, into envelope and submit.

In the event you are determined to be the apparent low bidder, and your bid is not more than ten percent (10%) above the amount of funds allocated for the project, it is likely that you will be awarded the contract.

Show Me The Money...Now!

In these difficult economic times, an Owner and/or Contractor may be tempted not to make full and final payment after the work is complete and there is beneficial use and occupancy of the facility. The Owner and/or Contractor may justify this conduct even though there is not currently a problem with the work because there "may" be unanticipated future problems with that will need to be addressed. However, withholding payment for potential defects or warranty issues could turn out not to be a wise decision.

An Owner and/or Contractor’s "belief" that it may have warranty claims sometime in the future may be insufficient to justify withholding of final payment as explained by the Mississippi Supreme Court in Crawford Commercial Constructors, Inc. v. Marine Industrial Residential Insulation, Inc., 437 So.2d 15 (Miss. 1983). In that case, a subcontractor sued the general contractor for payment under a roofing contract. The general contractor had refused to pay the subcontractor on the basis that it "believed the roof was improperly installed, so that [the general contractor] will ultimately be required to repair it to satisfy the building’s owner." Id. The Court ruled that the general contractor’s "beliefs" were conjectural. Id. at 16. In affirming the trial court’s decision in favor of the subcontractor, the Mississippi Supreme Court stated:

Under our authorities there must be a present, existent actionable title or interest which must be completed at the time the cause of action is filed. (citations omitted). A mere inchoate right is not sufficient and neither is a prospective danger of injury. (citations omitted)…"It is certainly an undisputable and invariable rule of law that a right of action must be complete when an action therefore is commenced…."…"we consider it to be the well-settled, general rule, that the facts which constitute the ground of a suit must exist at the time the suit is instituted…"

 

Id. at 16.

In addition to this jurisprudence, Mississippi has enacted what are generally known as "Prompt Payment Statutes" for both public and private construction contracts. Both of these statutes require timely final payment once the contract has been determined to be substantially complete or there has been beneficial use and occupancy. There are also "Late Payment Interest Statutes" which apply when a contractor fails to make payment "without reasonable cause" to its lower tier subcontractors or suppliers within fifteen (15) days after receipt of payment.

There is no provision for recovery of attorneys’ fees in either the "Prompt Payment Statutes" or the "Late Payment Interest Statutes." Contractors therefore need to ensure the issue of attorneys’ fees associated with collection efforts are adequately addressed in their contract documents.

You can expect this case law and these statutes to be cited frequently in payment disputes during these difficult economic times.

Bureau of Building, Grounds and Real Property Management Updating Construction Manual

The Mississippi Department of Finance and Administration, Bureau of Building, Grounds and Real Property Management is currently updating its BOB Construction Manual.  This is your opportunity to participate in the process.  If you want to be heard, you should email Glenn Kornbrek, the Assistant Director for the Bureau of Building, Grounds and Real Property Management (KornbrG@dfa.state.ms.us).  Mr. Kornbrek’s telephone number is (601) 359-3894.